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1. The Financial Center Industry in Belgium

1.4. Harmful tax practices

As companies in the CCR and the NID benefit from low taxation, an interesting question is whether Belgium can be considered a tax haven. In this section I briefly assess whether Belgium is a tax haven and later evaluate if the CCR or the NID are harmful preferential tax regimes. Specifications of the different regimes are thoroughly presented in chapter 2.

1.4.1. Is Belgium a tax haven?

According OECD (1998) there are 4 key factors in identifying tax havens, see text box 1.1. The starting point of any examination of tax regimes is to look at the effective tax rate. The question is if the regime offers or is perceived to offer a place where non-resident can escape tax in their home

resident. Next, laws or administrative practices which prevent effective flow of information are other characteristics of a tax haven. These issues are commonly known as secrecy rules and protect the tax payers against scrutiny from their own tax authority. Furthermore, lack of transparency in provisions, may it be legislative, legal or administrative, that prevents effective exchange of

Text box 1.1. - Tax haven criteria a) No or only nominal taxes

b) Lack of effective exchange of information c) Lack of transparency

d) No substantial activities

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information is another factor. Such inability or unwillingness does not only help investors avoid taxes, but also facilitate illegal activity like money laundering or tax evasion. The last criterion is that there are no substantial activities. The absence of such a requirement suggests that the tax regime is attempting to attract purely tax driven transactions, and by this creating so called “paper companies”. A last, but important note, is that it is not enough to only satisfy one of the criteria, but one need to evaluate all four together to assess if a country is a tax haven.

Belgium would in such evaluation not be considered a tax haven. Even though financial centers in Belgium face low or no taxes, none of the other factors are satisfied and thus not sufficient to result in a characterization as a tax haven. First, the information flow from Belgium is satisfactory. The participants in the regime are large multinationals and these are in general very professional and accommodating when it comes to information exchange with government bodies. They are especially afraid of scandals, and would not risk something that can severely damage their reputation and brand. Second, the transparency in the regime is satisfactory as there are no laws or administrative procedure preventing effective flow of information. And third, the activity in the centers is substantial and all evidence point in the direction that transactions are not purely tax driven.

1.4.2. Are the CCR or the NID harmful preferential tax regimes?

A number of OECD members and non members have introduced preferential tax regimes for certain specific industries. So even if Belgium as such is not regarded as a tax haven, the tax regimes might still be harmful. The OECD lists five factors in identifying and assessing harmful tax regimes, shown in text box 1.2. These are somewhat similar to the factors for tax havens, the only difference is the point about “ring-fencing “. “Ring-fencing” is a regime partly or fully separated from the domestic regime or the domestic tax payers. The fact that the regime is excluded from the national regime implies that the authorities feel the need to

protect its own economy and hints of a harmful regime. “Ring-fencing” may take several forms, e.g.

the resident taxpayers are explicitly disqualified for the regime, or the participants of the regime are excluded from the domestic market. Albeit not as important, a fifth criterion listed in the OECD report is an artificial definition of the tax base. The OECD recognizes the need for narrowing the tax base to take into account inflation and offset impacts of double taxation etc. However, to go beyond

Text box 1.2. - Harmful tax

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what economic reasoning can explain is considered harmful. Again, to assess whether a regime is harmful, all five factors must be evaluated. A regime can be considered harmful if a factor works in combination with one of the others. An additional note to make is that economic considerations also influence the characterization of a regime. Meaning, if the regime shifts activity from one country to another due to tax differentials, this is a significant economical effect and should be taken into account. Alternatively, if the regime does not have any economic effects, the regime is not described as harmful.

The NID regime provides in some instances low or no taxes, i.e. in the case where companies earns very low Return on Equity (ROE), but normally corporations will be subject to a “normal” tax rate.

The regime is available for all companies in Belgium and as discussed above, there is effective exchange of information and there is not a lack of transparency. Subsequently, the NID is not considered harmful.

The CCR on the other hand satisfies two of the requirements, in addition to the fifth condition. The two criteria not met are again lack of transparency and lack of effective exchange of information which must be considered as satisfactory in Belgium. Taxation of financial centers in the regime is close to zero, if not zero, and thereby meets the first criteria. For example Statoil did not pay any taxes at all in their last 5 years in the CCR. Additionally, the taxable base in the CCR is artificially constructed as it has no connection whatsoever with income and profitability of such centers. The CCR is also ring-fenced as participants in the regime must satisfy stringent conditions, and the regime is limited to multinational companies above a certain size. In fact, in a subsequent report from the OECD in 2000, potentially harmful tax regimes in the member states were identified. The CCR was recognized as a harmful preferential regime in the fields of insurance, financing and leasing and headquarter activities. Additionally a report filed by the Code of Conduct Group to the Council of the European Union (1999) supports this conclusion and characterizes the Belgian CCR as a harmful tax measure. As a consequence of these two reports the focus on tax havens and harmful tax measures increased. Belgium first tried to modify the regime, before they abolished it altogether and replaced it by the NID.

1.4.3. Summary

Even if Belgium possesses some of the characteristics of a tax haven with the CCR and the NID regime, the effective flow of information and transparency in the regimes ensures the legitimacy of the system. And while the NID in general does not meet any of the requirements of a harmful tax

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measure, the CCR has low or no taxes and is a “ring-fenced”, in addition to having an artificially constructed tax base. As a consequence the regime was labeled harmful by both the OECD and the EU which forced the regime to be shut down.